Resquinorak – Scenario Analysis That Surfaces Assumptions, Not Just Outcomes
Thinking more clearly about markets
Most investors who attempt scenario analysis end up doing something that looks rigorous but functions more like wishful thinking with extra steps. The typical approach involves constructing a central case that closely mirrors what the investor already believes, adding a mildly optimistic variant that feels plausible, and then appending a pessimistic case that is quietly treated as too extreme to take seriously. The result is a document that confirms rather than challenges. The pessimistic scenario is rarely stress-tested with the same care as the base case, and its internal logic is seldom examined to ask whether it is genuinely coherent or simply a list of bad outcomes stacked together. Genuine scenario comparison requires something harder: treating each scenario as a world that could actually arrive, with its own internal consistency, its own sequence of causes, and its own set of conditions that would need to be true for it to unfold. Until you can describe a scenario in enough detail that someone else could argue for it convincingly, you have not yet taken it seriously enough to learn anything from it.
The practical starting point is to separate scenarios by their underlying drivers rather than by their emotional valence. Instead of labelling cases as good, base and bad, it is more useful to ask what the fundamental disagreements are about the situation you are analysing. Perhaps the core uncertainty is whether a particular market dynamic will persist or reverse. Perhaps it concerns whether a company's cost structure is as durable as management suggests, or whether a regulatory environment will tighten or loosen. Each scenario should be anchored to a specific claim about how the world works, not just to an outcome you find appealing or frightening. Once you have identified those underlying drivers, you can ask what each scenario actually requires to be true, and crucially, which of those requirements conflicts with assumptions you are currently holding. This is where scenario analysis earns its keep: not in the scenarios themselves, but in the assumptions they surface. When you discover that your base case requires two things to be simultaneously true that are difficult to reconcile, you have learned something genuinely useful about your own thinking.
Examining uncertainty honestly also means being attentive to the difference between risks you can roughly quantify and those you cannot. Some uncertainties have historical analogues, a body of evidence, or at least a range of informed opinion that allows you to reason about their likelihood in a structured way. Others are genuinely open, meaning that reasonable, well-informed people disagree not just about the outcome but about the framework for thinking about it. Scenario analysis works differently depending on which type of uncertainty you are dealing with. For the first type, you can use scenarios to test the sensitivity of your thinking to different assumptions within a known range. For the second type, scenarios serve a different purpose: they help you identify what you would need to observe in order to update your view, and they keep you alert to signals that the world is moving in one direction rather than another. The discipline of asking, before anything has happened, what evidence would cause you to revise your position is one of the most underused tools available to an independent investor working through complex information.
Bringing this together into a working method means building a simple but deliberate structure for each comparison you attempt. Write out each scenario in plain language, describing not just the outcome but the sequence of conditions that would produce it. Then, for each scenario, list the assumptions it requires and mark which of those assumptions you currently hold with high confidence, moderate confidence, or genuine uncertainty. Look for asymmetries: if your optimistic scenario requires several things to go right simultaneously while your pessimistic scenario requires only one or two things to go wrong, that asymmetry is itself informative. Finally, identify what you would expect to observe in the near term if each scenario were beginning to unfold, so that you are watching for evidence rather than waiting for confirmation of what you already believe. None of this process will tell you what will happen, and it is not designed to. What it does is make your reasoning more transparent to yourself, which is the only honest foundation for making sense of genuinely uncertain situations.